nep-cba New Economics Papers
on Central Banking
Issue of 2018‒12‒10
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Strategic Deviations in Optimal Monetary Policy By Fabio Canetg
  2. New VAR evidence on monetary transmission channels: temporary interest rate versus inflation target shocks By Lukmanova, Elizaveta; Rabitsch, Katrin
  3. The Risk-Taking Channel of Liquidity Regulations and Monetary Policy By Stephan Imhof, Cyril Monnet, Shengxing Zhang
  4. Credit supply and demand in unconventional times By Altavilla, Carlo; Boucinha, Miguel; Holton, Sarah; Ongena, Steven
  5. Monetary policy and bank equity values in a time of low interest rates By Ampudia, Miguel; Heuvel, Skander Van den
  6. Employment Effects of Unconventional Monetary Policy : Evidence from QE By Stephan Luck; Thomas Zimmermann
  7. The Risk-Taking Channel of Monetary Policy in Macedonia: Evidence from Credit Registry Data By Mite Miteski; Ana Mitreska; Mihajlo Vaskov
  8. Managing Self-organization of Expectations through Monetary Policy: a Macro Experiment By Assenza, Tiziana; Heemeijer, P.; Hommes, C.H.; Massaro, D.
  9. The Real Meaning of the Real Bills Doctrine (revised Nov., 2018) By Sproul, Michael
  10. To Ask or Not To Ask? Bank Capital Requirements and Loan Collateralization By Degryse, Hans; Karapetyan, Artashes; Karmakar, Sudipto
  11. Macroeconomic Effects of Quantitative and Qualitative Monetary Easing Measures By Junko Koeda
  12. Cross-border spillovers of monetary policy: what changes during a financial crisis? By Barbosa, Luciana; Bonfim, Diana; Costa, Sónia; Everett, Mary
  13. Money Markets, Collateral and Monetary Policy By De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald
  14. Reserves For All? Central Bank Digital Currency, Deposits and their (Non)-Equivalence By Dirk Niepelt
  15. An Early Warning System for Systemic Banking Crises: A Robust Model Specification By O'Brien, Martin; Wosser, Michael
  16. The New Area-Wide Model II: an extended version of the ECB's micro-founded model for forecasting and policy analysis with a financial sector By Coenen, Günter; Karadi, Peter; Schmidt, Sebastian; Warne, Anders
  17. Monetray policy and asset price bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  18. Alternative Specifications of Fisher Hypothesis: An Empirical Investigation By S, Surayya
  19. Monetary theory and policy: the debate revisited By Jean-Luc Gaffard
  20. Optimal Monetary Policy in a DSGE Model with Attenuated Forward Guidance Effects By Hess Chung; Taisuke Nakata; Matthias Paustian
  21. Neo-Fisherian Policies and Liquidity Traps By Bilbiie, Florin Ovidiu

  1. By: Fabio Canetg
    Abstract: This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research questions is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-o between a stable in ation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. My main result shows that the central bank is willing to implement past policy commitments if a sucient fraction of agents is not aware of the exact end date of the policy commitment. This nding challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.
    Keywords: optimal monetary policy, strategic deviations, forward guidance
    JEL: E42 E52 E58
    Date: 2018–07
  2. By: Lukmanova, Elizaveta; Rabitsch, Katrin
    Abstract: We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle.
    Keywords: Monetary policy, Neo-Fisher effect, Time-varying inflation target, DSGE, VAR
    Date: 2018–11
  3. By: Stephan Imhof, Cyril Monnet, Shengxing Zhang
    Abstract: We study the implications of liquidity regulations and monetary policy on depositmaking and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
    Date: 2018–07
  4. By: Altavilla, Carlo; Boucinha, Miguel; Holton, Sarah; Ongena, Steven
    Abstract: Do borrowers demand less credit from banks with weak balance sheet positions? To answer this question we use novel bank-specific survey data matched with confidential balance sheet information on a large set of euro area banks. We find that, following a conventional monetary policy shock, bank balance sheet strength influences not only credit supply but also credit demand. The resilience of lenders plays an important role for firms when selecting whom to borrow from. We also assess the impact on credit origination of unconventional monetary policies using survey responses on the exposure of individual banks to quantitative easing and negative interest rate policies. We find that both policies do stimulate loan supply even after fully controlling for bank-specific demand, borrower quality, and balance sheet strength. JEL Classification: E51, G21
    Keywords: balance sheet strength, bank lending survey, credit demand and supply, non-standard monetary policy
    Date: 2018–11
  5. By: Ampudia, Miguel; Heuvel, Skander Van den
    Abstract: This paper examines the effects of monetary policy on the equity values of European banks. We identify monetary policy shocks by looking at changes in the EONIA one-month and two-year swap contract rates during narrow windows around the press statements and press conferences announcing monetary policy actions taken by the ECB. We find that an unexpected decrease of 25 basis points on the short-term policy rate increases banks’ stock prices by about 1% on average. These effects vary substantially over time; in particular, they were stronger during the crisis period and reversed during the recent period with low and even negative interest rates. That is, with rates close to or below zero, further interest rate cuts became detrimental for banks’ equity values. The composition of banks’ balance sheets is important in order to understand these effects. In particular, the change in sensitivity to interest rate surprises as rates drop to low and negative levels is much more pronounced for banks with a high reliance on deposit funding, compared to other banks. We argue that this pattern can be explained by a reluctance of banks to pay negative interest rates on retail deposits. JEL Classification: E52, E58, G21
    Keywords: bank profitability, ECB, monetary policy, negative rates
    Date: 2018–11
  6. By: Stephan Luck; Thomas Zimmermann
    Abstract: This paper investigates the effect of the Federal Reserve's unconventional monetary policy on employment via a bank lending channel. We find that banks with higher mortgage-backed securities holdings issued relatively more loans after the first and third rounds of quantitative easing (QE1 and QE3). While additional volume is concentrated in refinanced mortgages after QE1, increases are driven by newly originated home purchase mortgages and additional commercial and industrial lending after QE3. Using spatial variation, we show that regions with a high share of affected banks experienced stronger employment growth after both, QE1 and QE3. While the ability of households to refinance mortgages after QE1 spurred local demand, the resulting additional employment growth was relatively weak and confined to the non-tradable goods sector. In contrast, the increase in overall employment after QE3 is sizable and can be attributed to the supply of additional credit to firms. To s upport this finding, we use new confidential loan-level data to show that firms with stronger ties to affected banks increased employment and capital investment more after QE3. Altogether, our findings suggest that unconventional monetary policy can, similar to conventional monetary policy, affect real economic outcomes.
    Keywords: Bank Lending ; Central Banking ; Employment ; Financial Crisis ; Quantitative Easing ; Real Effects ; Unconventional Monetary Policy
    JEL: E4 E00 E5 G00 G21
    Date: 2018–10–24
  7. By: Mite Miteski (National Bank of Republic of Macedonia); Ana Mitreska (National Bank of Republic of Macedonia); Mihajlo Vaskov (National Bank of Republic of Macedonia)
    Abstract: The last global crisis brought the monetary policy risk-taking channel to the fore, arguing that lingering low interest rates might affect not only the quantity, but the quality of credit extended as well. In line with this debate, this paper is the first effort to empirically investigate the potential existence of the monetary policy risk-taking channel in Macedonia. For this purpose we use a rather unique database of corporate loans, taken from the Credit Registry of the National Bank of the Republic of Macedonia (NBRM), which is complemented with data from banks’ balance sheets. By using pooled OLS on semi-annual data for the 2010-2017 period, our study points to an inverse relationship between the policy rate and the ex-ante risk rating assigned by the banks, a finding that is supportive to the existence of the risk-taking channel, although the effect is relatively small. The results prove to be robust after controlling for several bank, loan and time specific variables. We also test for possible difference in the risk-taking by banks conditioned on the capitalization level, but the results do not confirm difference in the reaction. The findings of the study are policy-relevant, as they confirm the need for policy makers to be mindful on financial stability impact when making monetary decisions.
    Keywords: Monetary policy, risk taking, ex-ante credit risk, leverage, POLS
    JEL: E43 E44 E52 G21
    Date: 2018
  8. By: Assenza, Tiziana; Heemeijer, P.; Hommes, C.H.; Massaro, D.
    Abstract: The New Keynesian theory of inflation determination is tested in this paper by means of laboratory experiments. We find that the Taylor principle is a necessary condition to ensure convergence to the inflation target, but it is not sufficient. Using a behavioral model of expectation formation, we show how heterogeneous expectations tend to self-organize on different forecasting strategies depending on monetary policy. Finally, we link the central bank ability to control inflation to the impact that monetary policy has on the type of feedback {positive or negative{ between expectations and realizations of aggregate variables and in turn on the composition of subjects with respect to the type of forecasting rules they use.
    Keywords: Laboratory Experiments; Monetary Policy; Expectations; Taylor principle
    JEL: C91 C92 D84 E52
    Date: 2018–11
  9. By: Sproul, Michael
    Abstract: The real bills doctrine asserts that money should be issued in exchange for short-term real bills of adequate value. Critics of this doctrine have thought of it as a means to make the money supply move in step with the production of goods, a task at which it supposedly fails. In this essay I explain that the real bills doctrine is actually a means to make the money supply move in step with the money-issuer’s assets. When viewed this way, I find that the real bills doctrine is an effective means to prevent inflation. More importantly, the real bills doctrine is a means to make the quantity of money grow and shrink with the needs of business, thus preventing money shortages and the resulting recessions.
    Keywords: real bills, backing, money, inflation, recession
    JEL: E5 E50
    Date: 2018–11–13
  10. By: Degryse, Hans; Karapetyan, Artashes; Karmakar, Sudipto
    Abstract: We study the impact of higher capital requirements on banks' decisions to grant collateralized rather than uncollateralized loans. We exploit the 2011 EBA capital exercise, a quasi-natural experiment that required a number of banks to increase their regulatory capital but not others. This experiment makes secured lending more attractive vis-à-vis unsecured lending for the affected banks as secured loans require less regulatory capital. Using a loan-level dataset covering all corporate loans in Portugal, we identify a novel channel of higher capital requirements: relative to the control group, treated banks require loans to be collateralized more often after the shock, but less so for relationship borrowers. This applies in particular for collateral that saves more on regulatory capital.
    Keywords: Capital requirements; Collateral; Lending Technology; relationship lending
    JEL: G21 G28 G32
    Date: 2018–11
  11. By: Junko Koeda (School of Political Science and Economics, Waseda University (E-mail:
    Abstract: We estimate a structural vector autoregressive model with an effective lower bound of nominal interest rates (ELB) using Japanese macroeconomic and financial data from the mid-1990s to the end of 2016. The estimated results show that the Bank of Japan fs quantitative and qualitative easing (QQE) policy increased output via gpure h quantitative easing when the first-year fs QQE level effect was controlled, complemented by qualitative easing. Our nonlinear counter- factual analyses show that raising the ELB or lowering an inflation threshold in forward guidance is not necessarily contractionary.
    Keywords: effective lower bound of nominal interest rates, quantitative and qualitative monetary easing policy, forward guidance, structural vector autoregression, maximum likelihood
    JEL: E58 E52 C32
    Date: 2018–11
  12. By: Barbosa, Luciana (Banco de Portugal); Bonfim, Diana (Banco de Portugal, Católica Lisbon School of Business & Economics); Costa, Sónia (Banco de Portugal); Everett, Mary (Central Bank of Ireland)
    Abstract: This paper analyses cross-border spillovers of monetary policy by examining two countries that were in the eye of the storm during the euro area sovereign debt crisis, namely Ireland and Portugal. The research provides insight as to how banking and sovereign stress aect the inward transmission of foreign monetary policy to two economies that share many characteristics, but that also have many distinct features. In particular, our research addresses the question of whether a banking system in distress reacts more or less to monetary policy changes in other major economies. The empirical analysis indicates that international spillovers are present for US and UK monetary policy for both Ireland and Portugal, but there is heterogeneity in the transmission mechanisms by which they aect credit growth in the two economies.
    Keywords: Cross-border banking, euro area sovereign crisis, unconventional monetary policy spillovers, credit supply.
    JEL: G15 G21
    Date: 2018–10
  13. By: De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald
    Abstract: Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.
    Keywords: Eurozone; haircuts; money markets; unsecured interbank market
    JEL: E44 E58
    Date: 2018–11
  14. By: Dirk Niepelt
    Abstract: I o er a macroeconomic perspective on the \Reserves for All" (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not a ect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.
    Keywords: Central bank digital currency, Fedcoin, CADcoin, e-krona, e-Peso, JCoin, reserves for all, deposits, narrow banking, cash, equivalence, central bank, lender of last resort, politico-economic equivalence
    JEL: E42 E51 E58 E61 E63 H63
    Date: 2018–07
  15. By: O'Brien, Martin (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland)
    Abstract: Using a panel dataset of 27 developed economies, estimated quarterly from 1980-2016, we develop a flexible systemic banking crisis early warning system (EWS). Evidence is provided that fitted multivariate logit probabilities, estimated recursively against documented crises, yield more informative crisis signals than any single macroeconomic, credit aggregate or asset price variable does independently. When the model robustness techniques of Young and Holsteen (2017) are applied, even stronger crisis signals are generated. Deciding which variables to include in the model is determined by adopting a signals-based approach to each prospective indicator, with the most informative yet robust variables identified in terms of their performance according to noise-to-signal ratios, weighted noise-to-signal ratios and an Alessi and Detken (2011) “usefulness” measure. The latter takes policy-makers’ preferences for false versus missed signals into account. The approach ensures a parsimonious yet effective EWS yielding forwardlooking indicators that outperform all raw input indicators in crisis-signaling terms.
    Keywords: early warning system, systemic banking crises, macroprudential policy, model robustness, financial stability
    JEL: G01 G21 G28 E58
    Date: 2018–09
  16. By: Coenen, Günter; Karadi, Peter; Schmidt, Sebastian; Warne, Anders
    Abstract: This paper provides a detailed description of an extended version of the ECB’s New Area-Wide Model (NAWM) of the euro area (cf. Christoffel, Coenen, and Warne 2008). The extended model—called NAWM II—incorporates a rich financial sector with the threefold aim of (i) accounting for a genuine role of financial frictions in the propagation of economic shocks and policies and for the presence of shocks originating in the financial sector itself, (ii) capturing the prominent role of bank lending rates and the gradual interest-rate pass-through in the transmission of monetary policy in the euro area, and (iii) providing a structural framework useable for assessing the macroeconomic impact of the ECB’s large-scale asset purchases conducted in recent years. In addition, NAWM II includes a number of other extensions of the original model reflecting its practical uses in the policy process over the past ten years. JEL Classification: C11, C52, E30, E37, E58
    Keywords: Bayesian inference, DSGE modelling, euro area, financial frictions, forecasting, policy analysis
    Date: 2018–11
  17. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: This paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate new bubble indicators for the stock and housing markets in the United States based on structural, econometric and statistical approaches. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles contrary to the “leaning against the wind” policy recommendations. Expansionary interest rate policies would inflate stock price bubbles whereas expansionary balance-sheet measures would not.
    Keywords: Booms and busts; Mispricing; Price deviations; Interest rate policy; Unconventional monetary policy
    JEL: E44 G12 E52
    Date: 2018–11
  18. By: S, Surayya
    Abstract: Fisher hypothesis provides theoretical framework for the study of relationship between nominal interest rate and inflation. It assumes one to one direct relationship between nominal interest rate and inflation. Modifications to this model are explained by Mundell effect, Phillips curve and Friedman effect , Levi and Makin effect, Darby effect and Carmichael and Stebbing effect (Inverted Fisher Hypothesis). The objective of this paper is to explore the Fisher hypothesis and its alternative specifications using IFS Panel data set and applying General to Specific Methodology .Findings of this paper show that Inverted Fisher hypothesis holds in above average money supply ̷ GDP countries. Full Fisher effect is present only when Phillips curve effect and Friedman effect are also present in below average money supply ̷ GDP countries.
    Keywords: Fisher Hypothesis, Interest Rate, Inflation, Panel Data, General to Specific Model.
    JEL: E4 E40 E43 E5 E52
    Date: 2018
  19. By: Jean-Luc Gaffard
    Abstract: This paper is aimed at revisiting monetary analysis in order to better understand erroneous choices in the conduct of monetary policy. According to the prevailing consensus, the market economy is intrinsically stable and is upset only by poor behaviour by government or the banking system. We maintain on the contrary that the economy is unstable and that achieving stability requires a discretionary economic policy. This position relies upon an analytical approach in which monetary and financial organisations are devices that help markets to function. In this perspective, which focuses on the heterogeneity of markets and agents, and, consequently, on the role of institutions in determining overall performance, it turns out that nominal rigidities and financial commitment offer the means to achieve economic stability. This is because they prevent successive, unavoidable disequilibria from becoming explosive.
    Keywords: inflation, market, money, stability
    Date: 2018–11–28
  20. By: Hess Chung; Taisuke Nakata; Matthias Paustian
    Abstract: In this article, we explore the implications of attenuating the power of forward guidance for the optimal conduct of forward guidance policy in a quantitative DSGE model of the U.S. economy.
    Date: 2018–10–19
  21. By: Bilbiie, Florin Ovidiu
    Abstract: Liquidity traps can be either fundamental, or confidence-driven. In a simple unified New-Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("news") shocks, making income effects dominate substitution effects. The same condition governs Neo-Fisherian effects (expansionary-inflationary interest-rate increases) which are thus inherent in confidence traps. Several monetary-fiscal policies (forward guidance, interest rate increases, public spending, labor-tax cuts) have diametrically opposed effects according to the trap variety. This duality provides testable implications to disentangle between trap types; that is essential, for optimal policies are likewise diametrically opposite.
    Keywords: confidence and fundamental liquidity traps; Fiscal multipliers; forward guidance; monetary policy; neo-Fisherian; optimal policy
    JEL: E3 E4 E5 E6
    Date: 2018–11

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